The Office of Tax Simplification (OTS) is recommending aligning capital gains tax (CGT) rates with those attributable to income tax as well as sharply reducing the annual exempt amount in order to increase tax revenues and create a more equitable tax regime.
The independent body’s first report in July, described the current approach as one which is ‘counter-intuitive, creates odd incentives, or creates opportunities for tax avoidance’.
To address these distortions, the OTS has outlined four broad policy choices.
Rates and boundaries
It is felt that the disparity in rates between CGT and income tax can distort business and family decision-making and provides an incentive for taxpayers to arrange their affairs in ways that effectively re-characterise income as capital gains.
Two key areas are the use of share-based remuneration, and the accumulation of retained earnings in smaller owner-managed companies.
It is believed that the alignment of CGT rates with income tax rates could raise an additional £14bn a year for the Exchequer.
Annual exempt amount
It is also felt that the annual exempt amount is relatively high (£12,300 in tax year 2020-21). Thousands of people have reported net gains just below the threshold and so ‘use up’ the allowance.
The OTS report suggests that if the government’s policy is that the annual exempt amount is intended mainly to operate as an administrative de minimis, it should consider reducing the level of this.
The OTS also argues that the way CGT interacts with inheritance tax (IHT) is ‘incoherent and distortionary’. It says that CGT incentivises owners to transfer business and personal assets to others when the pass away as opposed to making transfers during their lifetime.
The OTS continues to recommend that a taxpayer should not get both an IHT exemption and a CGT death uplift.
A less distortive alternative to the uplift on death could be a ‘no gain no loss’ approach. This would mean where (except in relation to a person’s main or only home) the recipient is treated as acquiring the assets at the historic base cost of the person who has died.
This would make transfers in life and on death more neutral. The OTS considers there is also a case for going further, due to there still being an incentive to hang onto some assets until death in a range of other situations, particularly in respect of gifts.
Finally the OTS report says there is a policy judgement that the government needs to make about the extent that CGT reliefs should be used to help stimulate business investment and risk-taking.
The OTS argues that business asset disposal relief is miss-targeted if this is its objective, and that incentives for investment, should they be required, should apply at the time the investment decision is made Instead, business asset disposal relief has long been understood as having another objective, a specific relief when business owners retire.
The argument is that the government could consider meeting this objective by increasing the minimum shareholding to a higher level, maybe 25%. This would mean that the relief goes to owner-managers rather than a broader class of employees. The holding period could also be released up to 10 years, ensuring the relief only goes to people who have built up their businesses over time and also bringing back an age limit, perhaps linked to the age limits in pension freedoms, to reflect the intention that it mainly benefits those who are retiring.
If you are thinking of making any disposals, please contact us in order to discuss your options.